Buy the Dip is Dead (EP.288)

Episode Summary

Executive Summary: The episode centers on inflation, market volatility, recession odds, and what a “new regime” in markets might mean. The hosts argue the Fed is overanchoring to 2% inflation despite clear progress, discuss why markets can fall even after good CPI prints, and review evidence that stocks, bonds, and international equities may be setting up for a different 2023 than investors expect. They also cover AI, Elon Musk/Twitter, housing, meme stocks, and consumer behavior shifts.

Main Topics: Inflation and the Fed’s 2% target (Priority: 5/5): The hosts use YCharts data to argue that the 1980s show inflation can average well above 2% without being an economic catastrophe, and question the Fed’s insistence on staying fixed on 2% despite inflation trending lower. Market selloff after positive inflation data (Priority: 5/5): They discuss the surprising stock-market decline after a cooler-than-expected CPI release, suggesting the Fed’s hawkish messaging and forward guidance may be overriding the good inflation news. Recession odds and stock-market outlook (Priority: 5/5): The hosts debate whether a recession and new stock-market lows are likely in 2023, concluding that earnings probably weaken and that a down year is plausible even if the market has already absorbed a lot of bad news. Valuation, breadth, and regime change (Priority: 4/5): They review signs of froth being cleaned out, the rise in rates globally, the possibility of higher inflation/higher-rate regimes, and the chance that international stocks outperform US stocks if the dollar weakens. Retail behavior, ETFs, and the end of ‘buy the dip’ (Priority: 4/5): The episode highlights ETF flows, the death of BTFD-style chasing, and how retail investors still crowd into damaged names like Tesla even after massive drawdowns. Musk/Twitter, AI, and trust (Priority: 4/5): They critique Elon Musk’s behavior at Twitter as chaotic and self-defeating, while also noting how AI deepfakes and voice cloning may erode trust in online media. Housing, work, and consumer shifts (Priority: 3/5): The hosts revisit housing’s relative resilience, the impacts of mortgage structures, remote work, services-vs-goods spending, and how the pandemic permanently altered work and tech usage.

Key Arguments: Inflation does not need to be at 2% for long periods for the economy to function; the 1980s averaged 5.6% inflation and were not remembered as an economic hellscape. Markets can sell off even after a favorable inflation report because the Fed’s rhetoric and rate-path expectations matter as much as the print itself. A stock-market decline one year does not strongly predict the next year’s return; conditional probability shows down years are followed by down years only about 30% of the time. A recession is likely to weaken earnings in 2023, but that does not guarantee new market lows because much speculative froth has already been removed. If inflation and rates normalize lower, bonds should be a stronger stabilizer next year and could deliver better total returns than in 2022. International stocks may have a setup to outperform the US if the dollar rolls over and relative valuations revert. Retail investors are still buying high-conviction tech names, but the era of indiscriminate dip-buying appears to be fading. The Fed may be using tough language strategically to avoid an equity rally that would loosen financial conditions and undermine disinflation efforts. Elon Musk’s management of Twitter is portrayed as chaotic, overly personal, and damaging to both the product and his reputation. The pandemic accelerated structural changes in work, payments, and tech adoption, making remote work, Teams, and mobile ordering much more entrenched than before.

Data Points: US inflation rate in the 1980s: 5.6% average - Used to argue that inflation above 2% can coexist with a healthy economy. 1980s inflation below 3%: Not until 1983 - Shows how long disinflation took after the early-1980 peak. 1980s inflation below 2%: Not until 1986 - Illustrates the Fed’s long fight to return inflation lower. Share of 1980s with inflation 4% or higher: Almost 60% - Supports the argument that the decade was still economically acceptable. Share of 1980s with inflation 3% or lower: 14% - Shows how rare low inflation was during that decade. S&P 500 probability of being down two years in a row: 9% - Based on 1928-2021 data. Down years followed by another down year: 8 of 26 years, about 30% - Conditional probability analysis of market returns. Long-term annual stock-market positive rate: About 70% to 75% - Used to frame expected yearly equity odds. ETF inflows in 2022: $588 billion - Part of the shift from mutual funds to ETFs. Mutual fund outflows in 2022: $950 billion - Highlights the $1.5 trillion gap in flows. Gap between ETF inflows and mutual fund outflows: $1.5 trillion - Shows the scale of the asset-allocation shift. Worst-performing equity ETFs net flows: Outflows exceeding $11 billion - Evidence that investors are avoiding the worst performers. Top two ETF performance deciles net flows: $140 billion combined inflows - Shows continued preference for winners. ARK Innovation outperformance universe share: 100% from inception through 2017-2021 - Demonstrates the extraordinary bull-market run in disruptive-growth funds. Tesla decline from highs: 64% - Illustrates the severity of the drawdown in former market darlings. Tesla three-year return despite drawdowns: Still up 440% - Shows extreme volatility even after huge losses from peak. Russell 3000 firms with 20x price-to-sales: Roughly 450 down to 180 - Used to show froth being removed from expensive stocks. S&P 500 1% declines to end the week: Most since 1950 - Signals unusually weak Friday selloffs. Fed pause historical stock performance: Generally positive over the following 12 months - Apollo chart discussed as evidence that markets often rally once hikes stop. OpenAI/remote jobs on LinkedIn: Remote jobs rose from 1% to 14% of postings - Shows how pandemic-era work changes persisted. Applications to remote jobs: Over 50% of daily applications - Even though remote jobs are only 14% of postings, they attract most applicants. Crypto account transfer participation: Tripled from 3% pre-2020 to 13% - JP Morgan data showing pandemic-driven crypto adoption. Home sales in Detroit: Down nearly 15% month over month - Used to discuss housing activity slowing without immediate price collapse. Home price decline needed to match 2008 underwater distress: 40% to 45% from peak - CoreLogic estimate for current housing market to replicate past crisis conditions. Disney market cap relative to lows: Back to March 2020 lows - Despite Disney+, parks, and streaming expansion, the stock has round-tripped. Amazon market cap/price: Back to March 2020 lows - Shows that even mega-cap winners have been hit hard. Carvana peak market cap: $31 billion - Pandemic-era valuation peak. Carvana current market cap: Under $500 million - Illustrates one of the sharpest collapses of the cycle. Carvana short interest: 47% of float - Highlights how heavily shorted the stock has become. Meme stock performance: AMC down 92%, GameStop down 77% - Shows reversal of pandemic-era speculative favorites. Services spending vs goods spending: Services rising far faster than goods - eToro chart showing the economy is increasingly service-driven. Central bank hikes in 2022: 200 hikes across a sample of 38 central banks - Used to argue that the global rate regime has shifted dramatically. Fed labor-market gap: More than 4 million fewer workers than demand - Powell cited a structural labor shortage. Workers in Teams and chat vs Outlook: Minutes in Teams/chat surpassed Outlook - Microsoft commentary on post-pandemic work behavior. Federal Reserve projections for unemployment: 3.7% now; 4.6% in 2023 and 2024; 4.5% in 2025 - Used to criticize the precision of Fed forecasts. Federal Reserve projected fed funds rate path: 5% in 2023, 4% in 2024, 3% in 2025 - Illustrates the Fed’s expected tightening cycle.

Pivotal Quotes: "It’s not the number, it’s the direction." — Michael Batnick: Used repeatedly to argue that falling inflation matters more than hitting exactly 2% immediately. "Stocks are really the only game in town to ultimately be in inflation." — Brian Wilkinson (quoted in WSJ article): An individual investor explaining why he stayed invested despite market volatility. "We believe that the market cap associated with truly disruptive innovation will go from $7 trillion now to $210 trillion in the next eight to 10 years." — Cathie Wood (quoted): Presented as an example of extreme long-term valuation optimism.

Implications: Investors should expect a more unsettled 2023: earnings risk remains, the Fed may stay hawkish, and leadership could rotate toward bonds and possibly international equities. The episode argues for patience, diversification, and skepticism toward hype.